Aoyama Sogo Accounting Firm

Innovation Speed Quality

Vol.22C h a i r m a n ’ s

5/ 31/ 2023

C o l u m nJapan Lease Accounting Standards
to change in the future
Hello all. Today, I will talk about the draft accounting
standards for Japan related to lease transactions. Leasetransactions are transactions whereas the lessee
borrows and utilizes stores and facilities. There arebasically two types of leases. One is a finance lease
which essentially places the burden of all liability on thelessee. All other leases are classified as operating leases.
Until now, the lessee had only recorded financeleases on the balance sheet. However, under this draft,in general principle, the lessee will be required torecord all assets and liabilities related to the lease. The
intent is to align the Japen accounting standards withIFRS and to more accurately reflect the financial
position and performance of companies so thatinvestors can more easily evaluate companies.
The draft is expected to be applicable starting 2026.
If the standards take effect, there is a possibility thatsome industries may see big changes on their balance
sheets. For example, assets and liabilities on thebalance sheet may increase for companies that leaseproperty and subsequently sub-lease to tenants andlikewise for retail companies that rent storefronts. For
example, companies like Daito Trust Construction,
Daiwa House, and AEON are applicable in this context.

Furthermore, the accounting treatment of sale andleaseback transactions, where real estate like officeheadquarters and logistics warehouses is sold andsubsequently leased back for continued occupancy, will
also change. Previously, this type of transaction had theadvantage of separating real estate from the balance
sheet. However, under the new lease accounting
standards, depending on the contractual terms, theshrinking effect on the balance sheet may bediminished.

(Credit: Dentsu)

To provide a clearer picture, you can think of Dentsu
Group, Avex, and Recruit Holdings, which have madesuch transactions in the past.
The new lease accounting standards have thepotential to significantly impact corporate finance.
Therefore, providing careful explanations to investors
and other stakeholders is crucial. While the underlying
business remains unchanged, the balance sheet itself
will change, which may lead to a decrease in metrics
such as return on total assets and equity ratio.
This concludes the overview of the draft for the newlease accounting standards. As professionals inaccounting, it may feel unfamiliar since we areaccustomed to record just the finance leases on thebalance sheet. Moving forward, the draft will befinalized after getting public feedback. Companies andinvestors are advised to consider their preparations forthe new lease accounting standard based on this draft.
by Kazuhiro Matsuzawa, ChairmanCopyright(c)2021 Aoyama Sogo Accounting Firm Co., Ltd. All rights reserved.

Aoyama Sogo Accounting Firm

Innovation Speed Quality

Vol.22R e n e w a b l e

5/ 31/ 2023

E n e r g y

The Plan for Battery Storage Funds
One of the challenges of renewable energy isbalancing supply and demand. Energy storage
technologies are crucial in stabilizing the fluctuating
supply of renewable energy. We have been receiving
more and more inquiries about structures that invest inbattery storage.
The battery storage business is the business ofutilizing rechargeable batteries to stabilize power supply
and demand. Unlike the feed-in tariffs (FIT) for
renewable energy, there is no fixed purchase price, so it
does not ensure stable income. Instead, revenue
depends on the daily movements of various markets,and it becomes a business where you buy electricity forcheap in the market when there is surplus, then store
and sell it for a profit when the price rises.
Tokyo is facing both a climate crisis and an energy
crisis. To overcome these immediate issues and aim fora systematic transition towards decarbonization andimproved energy self-sufficiency, they will implement
measures centered around 'reduction (H)', ‘creation (T)',and ‘storage (T)' energy, referred to as 'HTT'.

From April 28 to May 31, 2023, they are recruiting
operators for the renewable energy/battery storage
fund. The purpose is to promote a broad-scale
implementation of grid-scale batteries that cancontribute to the stabilization of power systems. To
establish a finance model for grid-scale batteries, apublic-private partnership fund will be setup withcapital of 2 billion yen. The plan is to establish four newfunds in FY2023, with a total investment of 150 billion
yen to build out battery storages and charging
infrastructure.
In addition, the amendment of the Electricity BusinessAct in May 2022 has gradually expanded the battery
storage market as a component of the power
generation industry. We look forward to future
opportunities in serving SPC structures for battery
storage.

by Kenichi Shimizu, Corporate Officer

Copyright(c)2021 Aoyama Sogo Accounting Firm Co., Ltd. All rights reserved.

Aoyama Sogo Accounting Firm

Innovation Speed QualityVol.22

V e n t u r e

5/ 31/ 2023

D e b tFund-raising through Venture Debt
For startups, one method of fund-raising is the use ofventure debt. Considered the startup capital of theworld, the U.S. has been widely using it for a while now,and it’s slowly spreading in Japan as well.
Among those using venture debt are subsidiaries offinancial institutions, independent firms, and venture
debt funds. Among the types of securities, there areloans and convertible bonds. Most loans seems to haveshort-term financing periods of 6 to 18 months andannual interest of 5 to 10%.

In general, startups need sufficient time afterestablishment to become profitable, and in seed andearly-stage funding, equity is issued to angel investors
and venture capital. In the mid stage to pre-IPO latestages, companies often borrow from multiple financial
institutions in addition to venture equity funding.
So, what are potential uses of venture debt which
typically has short financing periods and high interest
rates relative to typical borrowings from financial
institutions? One use may be to bridge financing
between investment rounds. Typically, as startups grow,they go through series A to series B to series C equity
investment rounds.
However, not all startups succeed in securing sufficient
capital. For example, if the next investment round is in
one year and the company does not expect financing
from a financial institution because of their continued
operating losses, their working capital may run short. In
this case, venture debt is a viable funding option tokeep the company afloat.

Another case where venture debt becomes useful isto prevent dilution of the founder’s shares. There’s
often news of startup founders who make a fortune
through the sale of their shares through an IPO or M&A
deal. The greatest reason is that these founders held agood portion of their startup’s stock. If on the otherhand, funds were largely raised through equity fromoutside investors, the ownership shares of the founderwould gradually be diluted. For the founder whopoured his life into the startup, his ownership shares in
the company would decrease. In such a case, thecombination of equity and venture debt prevents
dilution of the founder’s shares while securingnecessary funds.
Since around last year, due to the turmoil in thecapital markets, I hear that venture capitalists arebecoming more cautious with startup investments.
Tough conditions will likely continue for startups as
some are facing lower equity prices in a down roundfrom the previous investment round.
As one form of capital in supporting the Japanesestartup ecosystem, I certainly hope more opportunities
arise in the future for utilizing venture debt.
by Jun Yoshioka, ASA Advisory

Sara Cultural Centre (Photo: Jonas Westling)
Copyright(c)2021 Aoyama Sogo Accounting Firm Co., Ltd. All rights reserved.

Aoyama Sogo Accounting Firm

Innovation Speed Quality

Vol.22J a p a n

R e a l5/ 31/ 2023

E s t a t e

Unizo Holdings files for Civil
Rehabilitation (Bankruptcy)
It was reported that Unizo Holdings filed for civil
rehabilitation on April 26th, marking the largest
bankruptcy of the year with reported debt of 126.2
billion yen. Coincidentally, our company newsletter
started internally two years ago (2021), and the firstarticle was about Unizo Holdings. That article isreposted below to provide a better understanding of thepast that led to the current situation (The title of thearticle was named “The Spring Storm” to describe theunseasonal severe storm that swept through much ofthe Kanto region).
==========

subsequently began a bidding war for the undervalued
stock comparative to the unrealized gain from property
holdings. The deal ultimately settled as an EBO(employee buyout) with Loan Star as the sponsor.
Meanwhile, in the real estate market, Unizo had
accelerated the sales of their properties in the past oneor two years. The move was a complete 180 of thecompany’s previous position of actively buying. Thereis speculation that the property holdings were hastily
sold to make repayments on the 200 billion yen debt
from Loan Star and the tens of billions in premium. It
seems that the rush to sell in combination with capitaloutflows resulted in the company becoming insolvent
and their corporate bonds being downgraded to junk(non-investment-grade bonds).
Currently, the focus is on the “agreement” between
the SPC “Chitocea Investment” for EBO use and UnizoHoldings. Simply put, the agreement states that “ifUnizo Holdings decides to repay any specific creditors
back, the other creditors should be protected byreceiving collateral or be repaid before maturity.”
However, the issue is that repayment to Loan Star isregarded as a violation of this agreement.

The Spring Storm

One investor that took advantage of this agreement
was ARCM, a Hong Kong hedge fund that purchased
these corporate junk bonds in bulk and demanded
reorganization of Unizo Holdings while suing Loan Star
to receive their capital back. Of the creditors, regionalbanks make up a large portion of the 88 financial
institutions and corporate bond holders. The Financial
Services Agency has concerns that the Unizo
bankruptcy would adversely impact regional banks andthe local economy.

Another year is passing without seeing the cherry
blossoms. On the other hand, the state of emergency
will be lifted on the 21st and there are reports overseasthat the vaccine is effective.

There will certainly be continued interest in the“Spring Storm” that has taken over the financial andreal estate industries. Unizo Holdings will face maturity
on 10 billion yen of corporate bonds on May 26th.

Besides Covid news, Unizo Holdings, which is a realestate firm affiliated with the former Industrial Bank ofJapan (currently Mizuho Financial Group) has gained alot of attention. Starting with the attempted
TOB(tender offer bid) by travel giant HIS, 8 companies
including Fortress, Blackstone, Elliott, and Ichigo

by Shigeru Hirai, Client Relations Group

Copyright(c)2021 Aoyama Sogo Accounting Firm Co., Ltd. All rights reserved.

Aoyama Sogo Accounting Firm

Innovation Speed Quality

Vol.22J a p a nTa x

5/ 31/ 2023

U p d a t e

Overview and key points of theelectronic invoice (digital invoice)
As mentioned in Vol. 16 of our newsletter, the“electronic invoice (digital invoice)” will be a key
component the workflow changes with the start of theinvoice system on October 1, 2023, and the electronic
record retention law on January 1, 2024. In this volume,
we will explain in further detail about the electronicinvoice.
In general, an electronic invoice is defined as all invoices
or related documents that have been prepared as digital
data. This includes both data files created on acomputer to be printed out, or paper documents thatare scanned. Of these documents, the term “digitalinvoice” represents a standardized and structureddocument.
Under Japan’s Digital Agency, the standard format was
selected as “JP PINT” which is based on the international
standard format Peppol. To comply with the retentionof qualified invoices for consumption tax, the “qualifiedinvoice” uses the format “Peppol BIS Standard Invoice JP
PINT (referred as Standard Invoice JP PINT) and“purchase statements” will use the format “JP BIS SelfBilling Invoice (referred as JP Self-Billing).”
However, solely creating digital invoices will not be
sufficient in meeting the requirements to apply
purchase tax credits for consumption tax. They must be
saved in compliance with the electronic record retention
law.

Another point worth noting is that under thequalified invoice retention method for consumption tax,
the qualified invoice issuer must oblige to thetaxpayer’s request to receive a qualified invoice.
However, there is no requirement to issue a qualified
invoice in an electronic (digital) invoice format.
Thus, a fixed portion of transactions are expected tostill be delivered as paper invoices. In conclusion, when
considering workflows for the invoice system andelectronic record retention law, companies should
utilize both the digital invoice for automation andefficiency and in conjunction make preparations tomanage paper documents and electronic invoices not indigital invoice format.

by Keiko Ikeda, Executive Manager

Currently, many vendors of accounting software andelectronic bookkeeping are developing software to bereleased by Fall 2023 to meet the requirements fordigital invoices and electronic record retention law.

Copyright(c)2021 Aoyama Sogo Accounting Firm Co., Ltd. All rights reserved.